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The Convention

The Convention. Why the HS2 Business Case is flawed Bruce Weston Hilary Wharf Stoneleigh, 19 February 2011. Who are we?. HS2AA - www.hs2actionalliance.org Evidenced based arm of the anti-HS2 campaign

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The Convention

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  1. The Convention Why the HS2 Business Case is flawed Bruce WestonHilary Wharf Stoneleigh, 19 February 2011

  2. Who are we? • HS2AA - www.hs2actionalliance.org • Evidenced based arm of the anti-HS2 campaign • Goal: to prevent HS2 – challenging the business case, exposing the myths, promoting better alternatives • Wharf and Weston • Management consultants: 21yrs in rail sector • Expertise in business planning, modelling, labour relations • Formally economist and operational research scientist • Last 6 years spent bidding for railway franchises • Live on HS2 route 3 – but focus is the business case

  3. Why believe us? • HS2AA critique of Business Case • Our findings have been endorsed by independent economics consultancy, FTI, led by Vicky Pryce (previous Hd of Government Economic Service) in their own report (December 2010) • Taxpayers Alliance are campaigning on the same case • HS2AA reports are fully referenced so any reader can check whether we have the facts right

  4. FTI consultants say……. • ‘…we broadly agree with the conclusions in the HS2AA Report’. Specifically FTI report: • “In our view the HS2 appraisal appears to overstate the case for HS2; some of the key assumptions are optimistic and, most notably, the benefits appear to be exaggerated. • The appraisal does not compare HS2 appropriately against alternative options. • The projections of future demand also appear to be optimistic as they are based on estimates of past relationships between demand and income growth when this relationship may be changing………” FTI report 13 12 2010 (Executive Summary) Bold highlights not in original text

  5. Key messages • No commercial case • Demand forecasts not credible – but overestimates • Benefits (at £32 bn) are greatly overstated • Assessment is flawed – ‘risk’ is not properly handled and ‘alternatives’ misleadingly presented • No robust evidence for wider economic impacts or regional regeneration - and this kills the case without touching any HS2 cost figures

  6. What are DfT’s ‘rules’? • Sophisticated rail demand model (based on PDFH) • Bespoke rules (NATA) for valuing all transport projects • Social cost benefit analysis • Plus non- monitarised elements • Reduces to Net Benefit Ratio (NBR) • ie social benefit for every £1 subsidy • >2 - ‘good’ - normal threshold • <1 - ‘poor’ - are the rules being followed and are they all appropriate?

  7. The key numbers without WEI with WEI Benefits: £28.7bn £32.3bn Costs: £17.8bn capital £7.6bn operating £25.5bn total Less incremental revenue £15.0bn Plus tax change (loss) £1.5bn Equals net cost to Gov. £11.9bn subsidy NBR: (benefits/subsidy) 2.4 2.7 All figures NPV (2009 prices) WEI: wider economic impacts Source: Page 95 of Command Paper - these are the numbers straight from the command paper

  8. What HS2 means to you • £1,500 per household (England) (phase 1 and 2 cost) • over £500M per minute saved (30 mins saving)* • almost £160M/mile* (or £100M/km)* • HS2 has an opportunity cost to us all • Strategic decisions – HS2 or Trident? • Public spending – HS2 or cuts in jobs, services? • Rail/transport investments – HS2 or electrification? * Based on Phase 1 cost - but only 8% in an Ipsos-mori poll said protect HSR from the cuts

  9. 1.No commercial case • Capital costs (NPV) £17.8bn • Infrastructure* £16.5bn • Trains* £2.8bn • Incremental revenue (NPV) £15.0bn • Incremental operating costs (NPV) -£7.6bn £7.4bn Net revenues (£7.4bn) cover c 42% of the capital costs • Total costs (NPV) £25.5bn • Incremental revenue (NPV) - £15.0bn • Tax change (loss) +£1.5bn £11.9bn A net cost to Government ie a subsidy of £11.9bn * Not NPV

  10. Problems with this subsidy • Encourages more travel • HS2 case depends on new passengers • 27% of all HS2 passengers (13.3m trips/a) are new trips • more than all those switching from air and cars (7.7m/a) • Travel is not ‘green’ • Out of line with policies to reduce travel, and ignores the revolution in communications technology • Targets those who can most afford it • Nearly half of long distance trips done by top income households - is this a sensible use of public funds?

  11. Who benefits? - subsidy for the rich but paid for by everyone

  12. 2. Demand forecasts overestimated • Rail forecast is twice what others say • Model ignores evidence on saturating demand for domestic travel (all modes) • Model ignores reasons for rail’s growth and hence future prospects • Eccentric use of PDFH rules • HS1 all over again? - HS2 rail forecasts are at least twice what they should be

  13. HS2 demand estimates HS2 Ltd demand forecast (2008 to 2033): • Rail increases 267% • background growth: 133% • uplift for HS2: 133% • Long distance car increases 44% • Domestic air growth 178%

  14. Origins of HS2 passengers Mtrips/a Switch from existing rail 57% 29.8 New trips 27% 13.3 Switch from air 8% 3.9 Switch from car 8% 3.9 50.8* Notes The ‘new trips’ demand are due to the uplift from HS2 The ‘switch from air’ volumes are higher than current air volumes between Heathrow and NW and Scottish lowlands The ‘switch from car’ is forecast to decongest the M1 by 2% * Further£7m/a left on WCML

  15. Transfers from air? - given trends, the 178% growth forecast looks very optimistic

  16. Rail forecast in context

  17. What do other forecasts say? - HS2 rail forecasts are twice what other experts say

  18. Evidence on demand saturation Total domestic transport per person (graph Dr D Metz with GVA/capita added) - but is demand saturated for rail too?

  19. Rail growth v other modes Total domestic travel (NTS 2009) - So rail growth is from modal shift (car and coach), but can it go on?

  20. Rail’s past growth and prospects • Can rail growth (and modal shift) continue if the total market is saturated? Why has rail’s share grown? Can it go on indefinitely? Better services eg WCML upgrade HS2 will blight progress Sophisticated ticketing Long distance done already Better use of time on-board Run out of steam before 2026 Subsidy Fare increases affect demand Eddington cautious Other rail markets saturating - evidence suggests reasons why rail growth may not continue

  21. Eccentric use of PDFH • PDFH more suited to short/medium term forecasts (as based on premise ‘future like the past’) • Use of V4.1 instead of V5 inflates demand substantially • V5 has lower income elasticities, and they do not get bigger with distance • Draft DfT guidance on income elasticity cap is ignored • Draft says use 2.5 (but 2.8 used) • Draft awaited SoS approval since April 2010 • Data for V5 income elasticities is old • PDFH ignores changes in how people use on-board time - looks like a possible case of bending the rules…..

  22. HS1 all over again? Channel Tunnel Rail Link passenger numbers • Even by 2009, demand (9.2m) was just 37% of original forecast (25m) for 2006 • so they can get it wrong!

  23. 3. Benefits are greatly overstated • What are the £32bn benefits? • Journey time savings greatly over-valued • Time on board has become useful • Average (£70k) salary not consistent with assumed growth • Crowding and waiting time (service frequency) benefits are artificial - benefits are more like £13bn than £32bn – about 60% overstated

  24. Breakdown of social benefits Transport user benefits: road rail total Business £1.3bn £16.3bn £17.6bn Leisure/commuter £0.7bn£10.4bn£11.1bn £2.0bn £26.7bn £28.7bn Wider economic impacts £ 3.6bn Total£32.3bn - rail user benefits probably under £9bn - nearly 70% overstated

  25. Business rail users

  26. Other rail users

  27. Business savings overvalued • On-board business time assumed to be 100% wasted • every minute saved is assumed to be a minute extra productive time (ignoring mobile technology) • clear evidence its not true now, and by 2026 there will be no productivity benefit • Value of business time is too high • Uses 10yr old values of rail business earnings (equivalent to £70k in today’s money) • Ignores the nearly five-fold growth by 2033 - the same small cadre of high earners won’t make all the journeys (the average rail business user < £70k salary) - so business time savings more like £1.8bn than £13.1bn

  28. Crowding and ‘waiting’ artificial • Crowding and waiting time benefits are claimed against an unrealistic comparison base • HS2 has 61% loading (cf with 49% now), but 81% in the unrealistic comparator (‘do minimum’)! • The realistic alternative has less crowding and more services eg RP2 has 53% loading • Crowding and ‘waiting’ benefits are an artefact of the unrealistic comparison – actually disbenefits • Crowding is undervalued by DfT – as don’t value the usefulness of time on board - so some benefits should really be disbenefits

  29. 4. Assessment is flawed Assessment must handle risk and use realistic comparator • Fails to incorporate risk • no scenarios, despite undertaking to Public Accounts Committee on covering ‘downside risks’ in future • no credit for avoiding forecasting risk • Fails to develop a best (optimised) alternative • No incremental costs and benefits comparison with HS2 • Completely ignores pricing option to constrain demand • Fails to use the best alternative that was developed, Rail Package 2 (RP2), in the assessment - either including risk or the right comparator would sink the case

  30. Fails to incorporate risk • ‘Scenarios’ are standard means of addressing correlated uncertainties • Any serious review of optimistic/downside futures would show: • HS2 current assumptions are top-end • assessment not robust, especially compared to alternatives of upgrading existing railway • Coping with risk favours short lead time, incremental options - it’s surprising that a multi-billion project fails to properly address risk

  31. Uncertainty and HS2 • Failure has real costs • A half built railway is worth nothing • What will we give up instead, worth £17.8bn • DfT’s advice: ‘Forecasts have been wrong before, and any strategy that tried to build a rigid investment programme based on fixed long-term forecasts would inevitably be wrong again. To overcome this challenge, the guiding principles in this strategy are: To invest where there are challenges now, in ways that offer the flexibility to cope with an uncertain future; and To put in hand the right preparatory work so that, as the future becomes clearer, the necessary investments can be made at the right time.’ - Delivering a Sustainable Railway, 2007 • An incremental solution

  32. Fails to develop a best alternative • DfT commissioned Atkins to produce alternatives to a new railway with rail and road upgrades • For trains Atkins considered: • longer trains and more trains • removing pinch points on WCML • uprating the Chiltern Line • Best option was to improve WCML (RP2), but: • ignored opportunity to implement early and incrementally • did not combine with longer trains (to 12 car) • DfT buried best option (RP2) • comparing on different and less favourable assumptions • still used ‘do minimum’ case for assessing HS2’s benefits - other major projects criticised for not developing best alternatives

  33. DfT misrepresents best VfM rail alternative (RP2) • DfT use (4) RP2a data in the White Paper (and not (1) RP2) despite: • different and more expensive leasing approach to rolling stock costs • being an inferior sensitivity on Rail package 2 (RP2) - so they hid the alternative scheme that had a better VfM than HS2

  34. DfT misrepresents potentialcapacity • DfT say in the White Paper (page 51) that the midscale rail upgrade alternative gives ‘about 50%’ more capacity, but • this figure (54%) is on a different basis to HS2 • DfT never show the figure on same basis as HS2 (ie compared to 2008 on WCML) anywhere - ie the 135% - so they hid the fact RP2 met the capacity needed for the 133% forecast growth

  35. Fails to use developed alternative • HS2 is not assessed against the best alternative developed by DfT • Use of a realistic alternative instead of ‘do minimum’ would turn assessed benefits into cost • Misrepresentation of RP2 (on both value for money (NBR) and capacity) conceals the better solution - DfT defend their decision on basis it did not produce ‘surplus’ capacity

  36. 5. No robust evidence for rebalancing the economy • How are economic impacts and regeneration valued by DfT framework? • The evidence for regeneration is limited • Special features of HS2 favour London • its gravitational pull • the forecast travel patterns – more people travel to London rather than to the regions (and 70% of users are leisure travellers)

  37. What the evidence shows • Two types of benefits in DfT’s framework: • Direct economic impacts (from HS2 itself eg time savings, denser travel to work areas) • Regeneration (other non transport investments made eg offices) • Direct economic impacts for HS2 are quantified: • business productivity benefits (already in HS2 business case) • + labour market improvements – (£2bn) • + improved business output in an imperfect market – (£1.6bn) • + ‘Imperial’ advised HS2 Ltd little to add from HSR – max £8/10m/a • Regeneration benefits for HS2 are qualitative: • HS2 Ltd got advice and concluded no strong evidence, but said • best regeneration opportunity is Old Oak Common – in the South! • Alternative assessment methods exist eg used for Greengauge21 (by KPMG), but currently have serious issues

  38. HSR and regeneration • Examples of benefits (Lyon, Lille) but also failures (Vendome, Haute Picardie) • To succeed need HSR station plus local transport development that integrates it • Improvements in vicinity of station may just be at the cost of surrounding areas ie no net benefit just a redistribution • HSR only relevant to service industries • HSR may draw employment away from a region, depending on competitive position

  39. HS2’s features favour London • HS2 is a railway predominantly to and from London • London is efficient on a global scale for services • DfT believe long distance rail trips to London will grow much faster than those from London • Unclear what this means for business travel • But for leisure (70% users) the result is obvious • Best regen opportunity identified by HS2 Ltd – Old Oak Common!

  40. Evidence of regeneration • HS2 Ltd’s assessment: “ It concludes that the key for a high speed rail station being a catalyst for significant local and regional development is the integration of that station into a coherent wider spatial strategy for the city or region. However it also notes that this will not be a win-win conclusion. Some areas within a wider region may lose out, and it is possible a region itself may lose with some activity encouraged to relocate towards London. Whether such impacts materialise and how significant they are will depend on the economic structure of the cities, as well as the actions of regional and local planning authorities.” A3.1.6, HS2 Demand Model Analysis

  41. Reminder of key messages • No commercial case • Demand forecasts not credible – but overestimates • Benefits (at £32 bn) are greatly overstated • Assessment is flawed – ‘risk’ is not properly handled and ‘alternatives’ misleadingly presented • No robust evidence for wider economic impacts or regional regeneration - and this kills the case without touching any HS2 cost estimates

  42. Other topics • Alternatives and capacity • More about wasted time on board trains

  43. Alternatives • Rail Package 2 (WCML upgrade) • Best VfM alternative ie 3.63 NBR - better than HS2 • Net cost £2bn - compared to £11.9bn of HS2 • More and longer rolling stock – 90 sets of 11-car • Tackles 7 infrastructure pinchpoints on WCML • Different rolling stock - • Could be improved further • 12 car operation • Declassifying some of first class • In cab signalling (ERTMS) – for 140 mph service • Implemented incrementally, as need arose

  44. Need a new railway to get capacity? Reclassify 1st Class - Capacity for free!

  45. Securing extra capacity Effect on rolling stock capacity (of longer/more trains) Train lengthening Total seating Capacity Note increase 9-car (52 sets) 22,985 0% 2008 base Part 11-car + 4 sets 30,404 32% Planned for 2013 (and included (56 sets) in ‘do minimum’ case) All 11-car (56 sets) 33,600 46% Shows effect of 11-car all sets All 12-car (56 sets) 37,856 65%* 12-car (as RP1 discusses) All 11-car (90 sets) 54,000 135% RP2 proposal for DfT All 12-car (90 sets) 60,840 165%** Effect of adding 12-car to RP2 *Becomes 72% if declassify one first class ie 3 instead of 4 **Becomes 176% if declassify one first class ie 3 instead of 4 - shorter lead-times, smaller cost, incremental

  46. Is time on long distance trains wasted? • Surveys done show business and other travellers use time productively • What account has been taken of recent technology? • Will the train be less productive than office or home? • ‘overheads’ • human needs • restrictions

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